By Tom Winnifrith | Friday 12 July 2013
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
This is a shocker. The directors of Patagonia Gold (PGD) are well paid. They have significant equity in the company but they want more. They want shareholders to reprice their share options in order to “incentivise” them. This has to be passed at an AGM. Shareholders should tell these fat swine to bugger off and vote no. And here is why.
I focus on the main two chappies at Patagonia since they have most of the options. That is Carlos Miguens and Bill Humphries – the former owns 13% of the equity the latter 3%.
Let’s start with pay. These fellow are not exactly starving. I refer to the 2012 annual report and details of payment in 2012 (with 2011 in brackets)
To Carlos J. Miguens $118,852 (2011: $120,293 plus bonus of $100,000) for his services as Director and Deputy Chairman. To William H. Humphries through his company Mining Management-Europe (MM-E) $269,399 (2011: $272,663 plus bonus of $100,000) for his services as Director and Chief Executive Officer of Patagonia Gold Plc.
Hmm.. use of companies that will be tax efficient and these chaps are clearly not on the bread line even if they pay full tax. But it gets better. Now have a look at related party transactions and these relate to Carlos Miguens:
Cheyenne S.A. (“Cheyenne”) During the year ended December 31, 2012, the Company paid $76 thousand (year ended December 31, 2011: $40 thousand) to Cheyenne for the provision of a private plane to facilitate occasional travel to outlying areas for Directors and senior employees. Cheyenne is a related party because Carlos J. Miguens is a Director and shareholder.
MB Holding S.A. (“MB”) During the year ended December 31, 2012, the Company paid $12 thousand (year ended December 31, 2011: $26 thousand) to MB for the provision of office space and related administrative services in Buenos Aires. MB is a related party because Carlos J. Miguens is a Director and shareholder.
Agropecuaria Cantomi S.A. (“Agropecuaria”) During the year ended December 31, 2012, the Company paid $39 thousand (year ended December 31, 2011: $46 thousand) to Agropecuaria for the provision of office space in Buenos Aires. Agropecuaria is a related party because Carlos J. Miguens is a Director and shareholder.
Lusemana S.A. (“Lusemana”) During the year ended December 31, 2012, the Company paid $36 thousand (year ended December 31, 2011: $40 thousand) to Lusemana for the provision of office space in Buenos Aires. Lusemana is a related party because Diego Miguens is a controlling shareholder and because of his family relationship with Carlos J. Miguens.
El Salvador 4040 S.A. (“El Salvador 4040”) During the year ended December 31, 2012, the Company paid $39 thousand (year ended December 31, 2011: $38 thousand) to El Salvador 4040 for the provision of office space in Buenos Aires. El Salvador 4040 is a related party because Cristina Miguens is a shareholder and because of her family relationship with Carlos J. Miguens.
But now we come to options. The board says that there were a stack of options granted in 2010 and 2011 which are now underwater ( they are at 40-50p) and so with the shares at 8p they need to be re-priced in order to incentivise key personnel, mainly Mt Humphries and Mr Miguens. An AGM has been called to approve this.
I quote from today’s circular:
The Options are currently significantly 'underwater' compared to the current market price … and the Directors believe that they are not therefore acting as an effective incentive to the holders of the Options. The Options were granted during a period when the Patagonia Gold share price experienced a sharp increase, which the Directors believe was largely in response to significant takeover activity in the gold sector during 2010, most significantly the successful bid for Andean Resources by Goldcorp in September 2010 in a competitive bid process, and prevailing record gold prices as uncertainty about the global economic outlook continued.
Whilst the Company has successfully made significant progress in achieving its development objectives throughout the intervening period, including most significantly the commencement of gold production from Lomada de Leiva, external factors, such as the recent decline in the gold price and a drop off in takeover activity, have led to the current share price being significantly below the level at which the Options were granted.
Accordingly, in recognition of the importance of options as part of the Company's compensation strategy, the Directors have recommended that the Options be re-priced to bring them in line with current market price of the Ordinary Shares and thus align the interests of current holders of the Options with those of shareholders.
It is proposed that the Original Exercise Price in respect of the Options be amended to 11 pence per share.
This is bolacca of the highest order on a number of counts.
1. The options granted have a life of ten years. Is Patagonia saying that the gold price will stay low/there will be no M&A activity for 10 years? Really? Of course not. All it is doing is to take advantage of a lull in sentiment to make the directors richer.
2. The directors do not tell you (you need to check out the annual report) that they also have a shed load of options granted before 2010 at 12.25p and 15p. They could have exercised those options when they were well in the money 18 months ago. The directors did not. Why? Because they know that options are a one way bet so they just sat on them.
3. The existing options, the pay, bonuses and their equity holdings are surely an incentive enough. Merely giving the directors a chance but not an obligation to buy more cheap stock IF and WHEN the gold price rockets during the next 10 years does not align their interests to shareholders. Because if gold race s ahead the shares may be 50p again. How then would directors exercising options at 11p align them with other stockholders it would be pure dilution.
4. If you check the annual report you will see detailed analysis suggesting that Patagonia’s three assets are very valuable in terms of NPV etc even at $1200 gold. If the annual report is to be believed then the directors (who wrote it) know that today’s share price is just wrong and thus their repriced options are just free money.
This proposal comes from a greedy board that needs no more incentivisation to deliver. Shareholders should make a point of attending the AGM and voting NO.
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